Monetary policy easing still unlikely despite inflation sinking to record-low

See why it won't trigger pre-emptive action.

Singapore registered a record low headline CPI inflation of 0.4% yoy in February 2014, reports OCBC, suggesting a slackening o domestic inflationary pressure but this should not trigger a monetary policy easing in April.

"The fading domestic inflationary pressure is indicative of the efficacy of the macro-prudential measures and less of a catalyst for any pre-emptive monetary policy easing per se in April, especially given that GDP growth is stabilizing," said OCBC.

Here's the complete viewpoint from OCBC:

CPI inflation retreated more than expected in Feb. Inflation retreated faster than expected in Feb, rising by only 0.4% yoy (slowest since Jan 2010) and a sharp pullback from the 1.4% yoy seen in Jan, as private road transport costs fell a significant 7.1% yoy (due to high base effects) and the dip in petrol pump prices. In on-month terms, headline CPI fell 0.1% on a non-seasonally adjusted basis, and marking the second mom drop in three months. This also contrasted with our forecast for +0.8% yoy (+0.2% mom) in Feb, and the Bloomberg consensus forecast of +0.9% yoy (+0.2% mom nsa).

OOA-related inflation beginning to fade as CPI driver. On the housing front, fuel & utilities and household durables also fell on-year, which coupled with more gradual increases in imputed rentals on owner-occupied accommodation, may help to keep a lid on housing-related inflationary pressures going forward. Notably, CPI excluding accommodation fell 0.1% yoy (-0.1% mom) in Feb in its first decline since Nov 2009. Food inflation also eased from 3% in Jan to 2.3% in Feb “due to the correction in non-cooked food prices after the Chinese New Year as well as the high base last year”. The subsiding food inflation was most apparent in sugar, cooking oil, seafood prices which led declines in February.

Core inflation may climb with wage cost pass-through. MAS core inflation also subsided from 2.2% in Jan to 1.6% in Feb, attributed to less costly food and services. While MAS expects overall imported inflation to remain subdued, domestic costs could pass through more significantly to consumer services, as firms face rising costs from labour. This is already apparent for tuition & fees (+3.4% yoy), healthcare costs (+4.0% yoy) and recreation & entertainment (+2.9% yoy) in Feb.

Subsiding inflation is unlikely to be a catalyst for monetary policy easing. Jan-Feb headline CPI is running at only 0.9% yoy, suggesting full year inflation could easily print at the lower end of the 2-3% official headline and core CPI forecasts. Our 2014 headline and core inflation forecasts are 2.2% yoy and 2.5% yoy respectively. Nevertheless, the fading domestic inflationary pressure is indicative of the efficacy of the macro-prudential measures and less of a catalyst for any pre-emptive monetary policy easing per se in April, especially given that GDP growth is stabilizing.